How to protect economic activity areas in the crisis time?

The March 19 presidential order on a number of measures to reduce the negative impact of the coronavirus (COVID-19) pandemic and, consequently, sharp fluctuations in world energy and stock markets on the economy of the Republic of Azerbaijan, macroeconomic stability, employment issues, and entrepreneurship subjects is currently the subject of extensive discussion among the public. According to the order, 1 billion AZN has been allocated to the Cabinet of Ministers of the Republic of Azerbaijan from the 2020 state budget. Four working groups have been set up to distribute the allocated funds. Such that working groups have been established under the management of the Minister of Economy to assess the impact of the pandemic on the economy of the Republic of Azerbaijan, the Minister of Finance to prepare appropriate proposals for state support to businesses that are likely to suffer from the pandemic, the Minister of Labor and Social Protection of the Population to prepare relevant proposals to address employment problems and social problems that may arise in the country from the possible negative effects on the economy, and the Central Bank to prepare proposals for additional measures to maintain macroeconomic stability in the Republic of Azerbaijan in the event of a pandemic.

The working group, led by the Minister of Economy, must approve the relevant criteria for determining the list of areas of economic activity likely to be affected by the pandemic and legal entities operating in these areas and individuals carrying out entrepreneurial activities without establishing a legal entity within 15 days, as well as must prepare relevant proposals and submit them to the Cabinet of Ministers of the Republic of Azerbaijan in order to reduce the negative impact of the pandemic on the country's business environment in the near and medium-term, as well as to support the continuation of economic growth in the country during this period. In this article, I would like to share my views on the work of the group led by the Minister of Economy.

First, the working group should include, along with government officials, representatives of interest groups (economic agents, entrepreneurial associations, business associations by areas and sectors), as well as representatives of economic think tanks. Therefore, it is important that the working group can also prepare comprehensive and quality proposals, taking into account the different interests of different groups. However, I would like to note with regret that the institutional backwardness of the country's economy, the lack of business associations in the field reduce the level of public participation in this area.

Second, the working group has a lot of time for its objectives. It is possible to complete the preparation of proposals within a week in order to develop appropriate criteria for identifying areas of business affected by the coronavirus and to reduce its negative impact on the business environment of the country. I think that the delay in this matter will lead to an increase in costs. Therefore, in order for the decisions to be agile and targeted, the working group must complete its work as soon as possible.

Third, among the goals of the working group, it would be more effective to jointly organize the activities of the first and second working groups to identify losses of businesses affected by the coronavirus and to implement effective government support in this regard. However, the working group led by the Minister of Finance was given 25 days to prepare proposals for the provision of state support to economic entities and legal entities and individuals engaged in entrepreneurial activities. I think that this period will prolong the process and have a negative impact on the effectiveness of state support.

It is no secret that the coronavirus pandemic will have a negative impact on almost all sectors of the economy, but a positive impact only on communications and information under the special quarantine regime. Among these areas, tourist accommodation (travel agencies, lodging industry, entertainment sector) and catering, passenger transport, especially air transport and rail transport will be most affected, as well as trade, agriculture, and industry will be partially affected.

Impacts on the trade sector will be in two directions and at different stages. In the field of sales of non-food products, companies that sell only home appliances and electronics that sell online have a better chance of getting out of the current situation.   Although food retailers have a chance to earn more due to the growing demand for the initial stage of the pandemic, then a decline in demand will lead to a decrease in their sales.   The Ministry of Economy forecast a 4.5 percent increase in GDP in trade and vehicle repair by 2020.

As for agriculture, due to the current sowing period in this sector, trade in the sale of seeds and seedlings may face difficulties due to the implementation of the quarantine regime. Even the restriction of inter-district traffic during the quarantine period will lead to a deterioration of financial flows. This will ultimately result in a delay in seasonal work in agriculture and a decline in productivity for many agricultural products.

As for livestock, as the processing industry and the sale of finished products more fall to the share of Baku, problems in the supply of goods will break the supply chain and create difficulties for the food sector. All this shows that the 4.8 percent growth forecast for agriculture by the Ministry of Economy for 2020 will not come true.

In other non-oil industries, the supply of goods will face problems if it depends on both local raw materials and imports. Therefore, the current special quarantine regime will affect both the agricultural and non-oil industries.

Works are expected to continue in the mining industry. Just, declining demand for fuel products produced by this sector will reduce their revenues.

Finally, the poor organization of online work of banks and insurance companies with customers, as well as the withdrawal of funds from banks due to devaluation expectations, as well as difficulties in fulfilling the loan obligations of banks and non-bank credit institutions will have a negative impact on the financial sector as a whole.

Therefore, I believe that the working group headed by the Minister of Economy should first assess the current situation in both sectors and value chains and determine the degree of impact of the coronavirus on economic activities and the activities of legal entities and individuals operating in these areas on a 10-point scale.

I think that economic agents and economic entities should be given tax and customs benefits based on their relations with domestic and foreign bases. Such that starting from April 1, basic foodstuffs, medical supplies, and medicines imported in the next quarter must be exempted from customs duties and Value Added Tax on imports. At the same time, small and medium-sized businesses should be offered long-term and low-interest loans starting next year.

A moratorium should be imposed on the payment of withholding taxes, property and land taxes within 6 months from next month, social contributions and income taxes should be calculated during this time, but their payment should be made at the expense of the state.

Donations to the Fund to Support Fight against Coronavirus should be included in expenses deducted from income or be exempt from tax when that amount is paid at the expense of profit.

Finally, the deadline for the submission of income tax return should be extended from March 31 to May 30.

Gubad Ibadoglu